Vertex, Inc. Q1 FY2025 earnings

Vertex's first quarter revenue rose 12.9% to $177.1 million. Gross profit increased 18.0% to $113.0 million, and gross margin reached 63.8%, up 2.7 percentage points. Operating income was $4.5 million, a swing to a profit from the prior-year quarter, and operating margin was 2.5%, up 3.5 percentage points. Net income was $11.1 million, up 314.7%. Deferred revenue was $354.9 million, up 17.9%. Operating cash flow, a GAAP measure, was $14.8 million, down 39.7%.

Key business metrics were solid but showed some retention pressure. Annual recurring revenue was $618.5 million, up 17.9%. That total included $6.6 million from Systax and $8.1 million from ecosio; excluding both acquisitions, ARR growth was 15.1%. Average annual revenue per direct customer was higher than a year earlier. Net revenue retention was 109%, compared with 112% a year earlier, while gross revenue retention was 95%, consistent with both March 31, 2024 and December 31, 2024. Vertex had 4,888 direct customers and 5,369 total customers at quarter end. The company employs over 1,900 professionals and serves a majority of the Fortune 500, according to the filing.

Management kept its focus on e-invoicing and artificial intelligence. Vertex completed a $15.0 million minority investment in Kintsugi AI for a 10% ownership interest, with an intellectual property sharing and commercial arrangement. That investment is separate from the $10.0 to $12.0 million of AI spending the company previously said it would make in 2025. The Kintsugi deal gives Vertex access to AI-driven sales tax compliance for small and midsize businesses, a market the company believes can expand its addressable opportunity.

Non-GAAP results were mixed. Adjusted EBITDA was $37.2 million, compared with $36.7 million, and Adjusted EBITDA margin was 21.0%, compared with 23.4%. Non-GAAP operating income was $31.3 million, compared with $31.7 million. Non-GAAP gross margin was 75.0%, compared with 72.5%. Non-GAAP net income was $24.5 million, and non-GAAP diluted EPS was $0.15. Free cash flow, a non-GAAP measure, was negative $12.3 million, compared with positive $4.5 million. The company attributed the free cash flow decline to lower operating cash flow and $7.0 million in additional investments in property and equipment and capitalized software.

Guidance for the second quarter of 2025 calls for revenue growth and Adjusted EBITDA of $35.5 million to $39.5 million, reflecting $1 million to $2 million of expenses that were expected in the first quarter but will be incurred in the second quarter. For the full year 2025, Vertex expects revenue growth, cloud revenue growth of 28%, and Adjusted EBITDA of $161 million to $165 million. Management said it continues to expect accelerating financial momentum through 2025. Risks include the lower net revenue retention rate, margin pressure from strategic investments in information technology infrastructure and business process re-engineering, integration of the Systax and ecosio acquisitions, a pending legal claim, foreign currency transaction losses, competition from other tax software and service providers, challenges in using and managing artificial intelligence, changes in tax laws and regulations, cybersecurity and data privacy risks, and global economic and geopolitical uncertainty.